There are 1.1 Billion smokers in the world. And 5 Trillion cigarettes consumed annually, generating $700B in revenue per year for the industry.
660B of those cigarettes are sold by $BTI to over 150M customers.
US Brands : Newport, Camel, Natural American Spirit
Global Brands : Dunhill, Kent, Pall Mall, Rothmans, Lucky Strike
Goal is to invest and grow non combustible products as fast possible while maintaining a 65% dividend payout ratio and less than 3x debt to ebitda ratio.
How's their current global positioning in non-combustible products?
Heat Not Burn : Glo is #2 in the world after IQOS.
e-vapor : Vuse is #1 after JUUL fiasco.
Oral : Velo is #1 outside US. 10% market share in US.
Goal for non-combustible products :
* By 2025, $7B in revenue from new categories.
* By 2030, 50M customers using new categories. Currently they have 13.5M customers, increased 3M in 2020.
Current splits :
10% of their revenue is from non-combustible products.
50% of profits are from US.
Emerging markets represent around 70% of volume, but they are only 25% of revenue.
They spent $27B to acquire the rest of Reynolds in 2017. Current debt to ebitda is near 3.5x, but they have been deleveraging for 3 years now. By end of 2021, it will be 3x.
Revenue has been marginally increasing from 2018.
2018, 2019 and 2020 numbers :
* Revenues : $31B, $34B and $35B
* Gross Profits : $25B, $28B and $29B
* Operating Profit : $12B, $12.1B and $13B
All 3 lines are non-decreasing for the past 3 years.
COGS has been pretty stable, although declining marginally.
* 2018, 2019 and 2020 : $5.7B $5.7B and $5.6B
This reflects the marginal decline in cigarette volume.
Guidance :
* Guidance 3-5% revenue growth and 7-9% earnings growth.
* They expect to generate cumulative free cash flow of around $55.5 billion over the next 5 years.
Needs little less than $1B in capex every year till then, because they are investing in new gen products.
At $39/share, market cap is $87.5B and enterprise value of ~$143B, because they have total borrowings of $61B and some cash in balance sheet.
Current price ratios :
* P/FCF = 8x
* EV/FCF = 13x
Thesis : Increased market share in new gen products, results in multiple expansion.
* At the guidance of $11B FCF per year for the next 5 years, and assuming 10 times FCF multiple, market cap --> $110B --> 5% CAGR.
* Dividends are currently 7.5%.
Total IRR : 5 + 7.5 = 12.5%
Currently they are using $3.6B of their FCF-after-dividends money to repay debt.
If we assume the same going forward, they would have repaid $18B, which brings total borrowings to $43B by 2025;
Enterprise Value --> ~$150B. Bringing EV/FCF multiple of 13, which is same as today.
For a perpetual owner :
* If we assume $11B in FCF going forward, that's 7.5% EV/FCF yield.
* Assuming 3% volume decline + 6% price increase per year, we get to 3% long term growth.
Total IRR --> 7.5 + 5 = 10.5%
Bonus (not included in any of the above calculations) :
They own 30% of ITC, which is worth $10B. ITC is one of the biggest consumer staple brands in India. Equivalent of Unilever and Nestle when it comes to brand mind share. Arguable ITC itself is undervalued in market cap.
"If you risk something that is important to you for something that is unimportant to you, it just does not make any sense."
"If you hand me a gun with a 1000 chambers in it, there's a bullet in 1 chamber, and you said 'Put it up to your temple, how much do you want to be paid to pull it once?' I'm not going to pull it."
"You can name any sum you want but it doesn't do anything for me on the upside and I think the downside is fairly clear. I'm not interested in that kind of a game"
Every single time my wife opens an $ETSY package, she sees a handwritten note from the seller. She goes "Awww. That's so sweet" and she posts a picture of the note along with the item on her IG stories. The number of times she has done that with an $AMZN package : 0.
Thesis : Internet has democratized entrepreneurship. That's the theme of last 2 decades and it's going to be the theme for next 2 decades as well.
That's a change I guarantee will never revert. $EBAY $AMZN $SHOP $FB continue to contribute and benefit from this theme.
All of them have carved their niches and so has $ETSY. Every one I know dreams of running a self sustainable business and $ETSY makes it possible by giving sellers a increasingly global audience. It gives buyers a wider selection of personalized items.
$ADSK was THE software to learn when I was growing up. My dad showed off CAD to me 20 years ago when his employer was building a textile factory back in India.
The learning curve and high switching costs, combined with $ADSK's iteration on old products and introduction new products to students for free produces a wide moat and strong momentum in the user base.
Informative podcast :
*
In the short term, their move into subscription/cloud model, might provide much more predictable revenues.
Looking at growth numbers :
* Revenue grew from $2.2B to $3.8B at 5.6%
* Gross profits from $2B to $3.4B at 5.5%
* Free cash flows from $510M to $1.3B at 10%
"This is the key part of Warren Buffett’s philosophy that folks overlook. He talks a lot about return on retained earnings. Whether keeping an extra dollar in a business tends to result in an extra dollar being added to the market cap."
Good read!
"If you buy into a leveraged company & it deleverages over the next 10 yrs, your returns would be very poor compared to what you'd expect, they'd be much lower than the business. Let's say you are paying a 5% interest rate on your bonds/loans, you're paying like 4% after tax."
"If you have a company, and they take 3/4/5 years in a row of free cash flow & dedicate most of it, while you own the stock, into paying down that debt, it's the same as if they went out & invested in a project that returns 4% after tax"
"It's hard to think of anything that's as unprofitable as paying down debt. Paying down debt is a very very low return use of cash, except for companies that are super heavily indebted and have incredibly high interest rates."
$CVS 2021 guidance -->
Cashflow from operations : $12B
Capex : $3B
Adjusted operating income across segments :
* Health Care Benefits : $5B
* Pharmacy Services : $6B
* Retail/Long-Term Care : $6.5B
3 segments of almost equal size.
Cue the cross selling / flywheel slide.
After Aetna acquisition, leverage ratio is now at 4x. Goal is to reduce it to 3x by 2022.
"We've hit the 2021 run rate and the synergies are fully embedded in the business."
"Millions of new customers will engage with CVS Health for the first time through testing and vaccine administration services. We will use this opportunity to shape a health experience that demonstrates the value we bring."